San Francisco Examiner
November 13, 2009
by Irwin Stelzer
“Buy gold,” we are told by no less an authority than G. Gordon Liddy. “It’s value has never gone to zero,” says an official once in charge of America’s gold hoard, including the bars stored in Fort Knox.
Why investors should find that reassuring is not obvious, but never mind. They have bid the price steadily up past the $1,100 per ounce mark, from around $270 at the beginning of the decade and around $700 when the current crisis in financial markets hit the value of stocks and property.
And a very rich and very shrewd investor is telling friends that he expects the current price to more than double in the next five years.
It seems that investors, or at least many of them, have decided that the Obama administration and the Bernanke Federal Reserve are combining to depreciate the dollar, the former willingly to encourage exports, the latter warily.
Talk of the devaluing of other nations’ paper currencies at one time produced a flight to the dollar, deemed safe from the depredations of rulers trying to shore up their struggling economies by printing money.
But times have changed. There’s now so little faith in the value of the dollar that investors are fleeing to Brazilian reals and Russian rubles — or so it seems.
Of course, with interest rates in America close to zero, some investors are borrowing dollars at virtually no cost and using them to buy currencies and assets in nations in which interest rates are high enough to make such a trade profitable.
That drives up the value of those currencies relative to the dollar, which upsets other countries, since the rise in the value of their currencies makes life more difficult for their exporters, and encourages consumers to buy imported goods that are cheaper in the local currency — fewer jobs for locals.
That’s why Russia, Korea and Thailand are buying dollars in an attempt to hold down the value of their own currencies.
More important for the long run is the loss of faith in the dollar. Investors see a U.S. government awash in red ink, with budget deficits running at high levels for as far ahead as the eye can see.
And they see a Federal Reserve Board chairman buying the IOUs the government is issuing, printing money to pay for these bonds and notes.
Fear that a flood of new dollars will reduce their value typically produces a flight to “hard assets” — gold, silver, commodities, art — that will in the future fetch more of these depreciated dollars, offsetting the declining value of each one.
Investors know that when the debt being run up finally has to be paid, the government will have only three choices: reduce spending, raise taxes or print more dollars.
Forget spending cuts. This administration has no intention of cutting spending. Indeed, it’s pushing through Congress a new health care entitlement program that it says will cost $1 trillion — and that only if you believe that this is the first government program that will not see its cost explode over time. And hold onto your wallets when the cost of the energy bill is toted up.
The government could of course pare the deficit by raising taxes, which it’s in the process of doing, aiming specifically at the wallets of the so-called rich — families earning more than $250,000 per year. The problem is that there aren’t enough of these relatively high earners to cover the budget deficit, no matter how hard the government squeezes them.
Finally, the government could print enough money so that the value of every dollar bill drops, enabling the government to pay off its creditors in cheap dollars. It’s called inflation.
So why hold onto dollars when they will buy less at a later date? Instead, stock up on gold, which for some reason not entirely clear to most economists holds its value. Sometimes.
In the early 1980s, when President Ronald Reagan and Paul Volcker, then Fed chairman, wrung President Jimmy Carter’s inflation out of the system, the price of gold halved as faith in the enduring value of the dollar was restored.
There is a lesson here: Adam Smith had it right when he called his trade Political Economy. The value of the dollar, the price of gold, and the levels of spending, taxes and the deficit are not the result of inevitable forces, but of political choices. In a democracy, those are always subject to change.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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